Q2 2025 Earnings Call Transcript

Thank you for standing by, and welcome to the Eaton Second Quarter 2025 Earnings Results Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Yan Jin, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning. Thank you all for joining us for Eaton's Second Quarter 2025 Earnings Call. With me today are Paulo Ruiz, Chief Executive Officer; and Olivier Leonetti, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Paulo.

Then he will turn it over to Olivier, who will highlight the company's performance in the second quarter. As we have done on our past calls, we'll be taking questions at the end of Paulo's closing commentary. The press release and the presentation we'll go through today have been posted on our website. This presentation, including adjusted earnings per share, free cash flow and other non-GAAP measures.

They're reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to expected future results of the company and are, therefore, forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and the presentation.

With that, I will turn it over to Paulo.

Thanks, Yan, and thanks, everyone, for joining us. I'm really pleased with the first half of the year. Our team delivered a strong set of results. Among the Q2 highlights, our adjusted earnings per share were up 8% versus Q2 2024. Our segment margins hit a Q2 record, up 20 basis points versus 2024. Organic growth for the quarter was 8%, driven by growth in the Electrical Americas, Aerospace and Electrical Global.

On a rolling 12-month basis, our orders accelerated in Electrical Americas, now up 2% from down 4% last quarter. Our Electrical Americas backlog grew 17% year-over-year, hitting a new all-time record. Demand in our Aerospace business remains very strong. We had order growth of 10% on a rolling 12 months basis and a backlog expansion of 16% year-over-year.

As a result, our book-to-bill for the combined segments increased to 1.1. And we continue to deliver robust growth in the data center market as well. Our orders jumped approximately 55% and our sales were 50% up versus Q2 2024. A final highlight. We are raising 2025 guidance for organic growth and adjusted EPS at the midpoint. Olivier and I will dive into Q2 and the full year outlook in just a minute.

But first, let's go to Page 4 to have a conversation about our investments to grow the company. So on Page 4, I told you at our investor conference in March, we laid our bold new strategy. It's anchored by 3 pillars: lead, invest and execute for growth. All 3 are designed to accelerate our growth and create sustained value for our shareholders.

Those 3 pillars also align very well with the key mega-trends we've discussed for the last few years with you. Today, we will focus on the middle pillar, invest for growth. We executed strategic investments this quarter with key acquisitions, breakthrough technologies and transformative partnerships. This momentum is unlocking growth opportunities across our portfolio.

So we are accelerating our focus on high-growth and high-margin markets to maximize the opportunities ahead. And let's start with an acquisition on Page 5. We signed an agreement in June to acquire Ultra PCS. We are very excited about this deal, and we expect it to close in the first half of 2026. This acquisition strengthens our position in the fast-growing next-generation aerospace and defense markets. It ties in very well with our 2020 acquisition of Cobham Mission Systems.

Ultra PCS expands our exposure to both increasing global defense spending and expanding the European defense market. We anticipate cost and sales synergies, particularly from growing aftermarket services and securing new program opportunities. We expect this business to post high single-digit through low teens growth over the next several years with immediate margin accretion to our Aerospace segment. Now moving to Slide 6. We highlight our most recent acquisition, Resilient Power Systems.

This is a great example of how Eaton is investing for growth through cutting-edge innovation. This is a game changer for our data center customers and other DC power applications. Resilient makes solid-state transformer technology to replace traditional copper windings. It is a critical building block in the future high-power AI center designs as well as EV charging and battery storage.

Our customers see this capability as critical and very critical competitive advantage for us. It will accelerate and simplify the construction of AI data centers. But we're also investing for growth through strategic partnerships. You see 3 examples here on Page 7, NVIDIA, Siemens Energy and ChargePoint.

We partnered with NVIDIA to transform the infrastructure of data centers. NVIDIA understands the design is chip out and they recognize we are the partner they need. We bring incredible expertise and capabilities in power distribution architecture, including higher voltage DC power. So we are developing power management solutions for their high-density GPUs and solving other problems in the rack.

We've also joined forces with Siemens Energy. This partnership unlocks opportunities where utilities can't provide enough power to data center operators. In this case, Siemens handles the on-site power generation and Eaton takes care of the modular power distribution. Together, we deliver flexible distributed power with no dependency on the grid, which means shorter project time lines and greater operational flexibility to our customers.

Finally, we formed a partnership with ChargePoint, a leading EV charging provider. And jointly, we are developing global integrated EV charging, power distribution and software solutions, which enables vehicle electrification at scale. Broadly speaking, if I think about the portfolio, I hope you agree that we made strong progress in a short period of time. So we demonstrated a strong commitment and resolve to execute on our portfolio strategy.

We will continue to double down, investing in high-growth and high-margin businesses. And I'm proud of my team that delivered on our short-term commitments and at the same time, took decisive steps in our portfolio. Now I will turn it over to Olivier, who will walk us through our financial performance. Olivier?

Thanks, Paulo. I'll start by providing a brief summary of our Q2 results. We posted 8% organic sales growth at the high end of our guidance range, driven by broad strength in many of our end markets. We generated record quarterly revenue of $7 billion and expanded margins by 20 basis points to 23.9%.

Adjusted EPS of $2.95 increased by 8%, which is at the high end of our guidance range. Now let's move to the segment details. On Slide 8, we highlight the Electrical Americas segment. The business continues to execute at a high level and delivered another record quarter.

Organic sales growth of 12% was driven primarily by strength in data centers, up about 50%, along with strength in commercial and institutional end markets. This represents the 11th consecutive quarter with 25% or more growth on a 2-year stack basis. Operating margin of 29.5% was down 40 basis points versus prior year due to dilution from offsetting tariff cost on a dollar basis and higher cost to support growth initiatives. Orders accelerated to up 2% on a trailing 12-month basis from down 4%, with particular strength in the data centers, up about 55% in the quarter.

This represents a strong acceleration with quarterly orders up sequentially by more than 20%. Within the data center space, I highlight that there was particular strength from multi-tenant data center customers, which is consistent with the strategy we communicated earlier this year. Excluding the lumpiness from a large multiyear data center order in Q1 2024, orders for the segment were up 11%, accelerating from 4% last quarter on a rolling 12 months adjusted basis. Data center orders were up 23% on the same basis.

Even with record sales, book-to-bill increased to 1.1 with 17% growth in our large $11.4 billion backlog, providing strong visibility for our organic growth in 2025 and beyond. Our major project negotiations pipeline in Q2 was up 31% versus prior year, remaining at a high level, up approximately 60% since Q2 2023. Mega projects remain strong with 65 project announcements at a value of $333 billion on a year-to-date basis. The U.S. economy mega project backlog is approaching $2.4 trillion, up 31% year-over-year. Through Q2, about 50% of the projects have started, which still provides a multiyear runway.

The acquisition of Fibrebond closed on April 1, and the business is off a great start in our portfolio, exceeding our initial expectations for the quarter. Now I'll summarize the results for our Electrical Global segment. Total growth of 9% included organic growth of 7% and 2 points FX tailwind. We had strength in data center and machine OEM end markets.

We saw continued strength in APAC, posting double- digit organic growth and ongoing recovery in EMEA, up mid-single digits organically. Operating margin of 20.1% was up 110 basis points over prior year, driven primarily by sales growth and operating efficiencies. Orders were down 1% on a rolling 12-month basis with high single-digit growth in APAC. Backlog increased 1% from prior year, while book-to-bill remained at 1 on a rolling 12-month basis.

Before to move to our industrial businesses, I'd like to briefly recap the combined Electrical segments' performance. For Q2, we posted organic growth of 10% and segment margin of 26.3%, which was up 30 basis points over prior year. On a rolling 12-month basis, orders were up 1% and our book-to-bill ratio for our electrical sector remains above 1, over 1. Overall, we are very pleased with the Electrical businesses execution in the first half of the year and remain confident in our position for growth going forward. Page 11 highlights our Aerospace segment.

Organic sales growth of 11% remained at a high level and resulted in an all-time record sales. We had growth in all end markets and particular strength in defense and commercial aftermarket. Operating margin expanded by 70 basis points to 22.2%, driven primarily by sales growth. On a rolling 12-month basis, orders increased 10% with growth in all segments and particular strength in defense OEM, up 25%.

On a rolling 12-month basis, our book-to-bill for our Aerospace segment remained strong at 1.1, resulting in backlog increase of 16% year-over-year and 3% sequentially. Overall, Aerospace posted a solid first half, remains well positioned going forward, and we are very pleased to have signed the agreement to acquire Ultra PCS, as Paulo described. Moving to our Vehicle segment on Page 12. In the quarter, the business declined by 8% on a total and organic basis, primarily driven by weaknesses in the North America truck market. Despite top line weaknesses, the team managed to deliver solid margins of 17%, up from 15.5% in Q1. On Page 13, we show results for our eMobility business.

Revenue decreased 4% from 7% lower organic, partially offset by 3% favorable FX. Operating loss was $10 million. Now I will pass it back to Paulo to go over our market assumptions and guidance.

Thanks, Olivier. Strong results in Q2, and thanks for helping me shaping the portfolio. Moving on the assumptions for the year. Here on Page 14 is our view of Eaton's end market growth.

We see no material change in our end markets from the last quarter. Most of the end markets are growing fast. The up arrows represent 80% of our revenue, over 80% of our revenue. So we have many paths to growth and we believe it's sustainable.

And we see positive development in data centers and defense aerospace versus past quarter, while the other parts that aren't growing like residential, internal combustion engine, light vehicles and commercial vehicles are the smallest part of the company. We are confident in our end market positioning to deliver differentiated growth this year. Here on Page 15 is our updated guidance for the year for organic growth and operating margins. Big picture, we are raising our guidance for the year on both.

So let's start in the middle column: organic growth. We are increasing our guidance here by 50 basis points to a range of 8.5% to 9.5%. By segment, we have raised Electrical Americas by 50 basis points; Electrical Global by 100 basis points; and Aerospace by 200 basis points. Meanwhile, the growth of Vehicle and eMobility are weaker than prior expectations from challenging market conditions, as you know.

Now for margin guidance. As you see, our guidance is 24.1% to 24.5%, so it also increased our guidance range by 10 basis points. By segment, we have raised our expectations for both Electrical Americas and Vehicle by 20 basis points, but it's partially offset by lower margins in the eMobility business. Moving to Page 16. Here is our outlook for Q3 and our updated guidance for the year.

For the upcoming quarter, we see EPS of $3.01 to $3.07, and we see organic growth between 8% and 9%. And the segment operating margins between 24.1% to 24.5%. For the year, we are raising our adjusted EPS guidance to a new range of $11.97 to $12.17. This represents 12% growth in earnings per share at the midpoint. I will close with a quick summary on Page 17. We had a great quarter.

Record revenue, segment profit and margins. We see order acceleration, increase in negotiation pipeline and strong growth in our backlog. This gave us the confidence to raise our growth and earnings guidance for 2025. And we invest in our future growth as well as we are uniquely positioned as a growth company with a broad portfolio. Bottom line, we are delivering our financial commitments in 2025, and we are well positioned to deliver on our ambitious 2030 growth plan.

We believe our best years are ahead of us. And with that, we are happy to take your questions now.

Thanks, Paulo. [Operator Instructions] With that, I will turn it over to our operator to give you guys the instructions.

[Operator Instructions] Our first question comes from the line of Joe Ritchie from Goldman Sachs.

Yes. So I want to start on orders. So clearly, like, look, you saw a little bit of a rebound in Electrical Americas orders up this quarter versus down last quarter. I'm just curious, as you kind of think about the rest of the year, what is your expectation for Electrical Americas and Global orders?

And then similarly, clearly, your backlog continues to grow, that's giving you some more visibility. If you can touch on the backlog as well, that would be great.

Okay. Thanks, Joe. So we are really -- we had a very strong quarter with our orders, strong momentum. And we also see a much stronger negotiation pipeline.

So that gives us strong visibility into Q3 orders as well, especially in Electrical Americas. So as we have specific projects we are tracking and negotiating today, we expect this trend to continue to accelerate in Q3. And then if you ask about the backlog here, it's too early to call. But based on this performance, we can confidently say that we're going to have a book-to-bill higher than 1 for the year.

Great. That's great, Paulo. And if I could maybe just ask a follow-up to what you just said. If you think about like the different end markets, clearly, data centers have been strong.

If you backed out your data center orders this specific quarter, we're calculating that like the rest of EA, which was probably down somewhere in like the high single-digit order of magnitude, is that just a function of comp and that strength that you're seeing in 3Q? Are you seeing strength beyond data centers?

Yes. So the answer is yes to both. So if you extract the large Q1 order we had in 2024, the Electrical Americas orders are up 11% on a 12-month basis. So the underlying business is really strong.

We always point to 12 months rolling because those big orders can be really lumpy. So that's one reason to say that. And we see also strength in other markets. We're going to see big orders coming out of the data center as well.

And we are doing well in commercial and institution, and we are also winning in other markets like utilities and so on. So there is more than just data center. But data center with big orders changed to move the needle quite well.

And our next question comes from the line of Sabrina Ipps from Bank of America.

This is Andrew Obin? Hello?

Yes. Your line is open.

Yes. It's Andrew Obin. Just the question on Electrical Americas and just generally what's happening with the market share. Do you think Electrical Americas has been gaining market share in the U.S.? And just sort of following up on Joe's question, maybe more granularity, if you are gaining share, at what end markets?

Yes. No, thanks, Andrew, for the question. The short answer is yes, we -- the market data we see today points to market share gains in North America in a number of end markets. And the key proof point, we shared the data center performance, the business grew at 50%, where we estimate the market to be around the low 30s year-over-year.

And we believe as we put more capacity online in the second half, that this trend will be favorable, not only towards data center, but other end markets as well.

Excellent. And just maybe you highlighted acquisitions and just on data centers: Fibrebond and Resilient. Can you just please recap your data center strategy in regards to both gray space and white space? How do you see it going forward?

So as you guys know, we pride ourselves to have a broad and deep portfolio for both the gray and the white space, and we have a comprehensive strategy. And our starting point even before those moves was already a very strong one. But we keep strengthening our position as a company, listening to our customers. And we want to help them with the biggest, I would say, pain points they experience today, the biggest bottlenecks.

And I can list those bottlenecks to be the power availability, the speed that they have to build the data centers, and also they're looking at increasing their returns on their capital employed. So we are looking always for opportunities to make our customers more successful here. So addressing each one of those, the partnership with Siemens Energy helps with the power bottleneck that I mentioned before. Our Fibrebond acquisition, that means modular solutions for the equipment, addresses 2 pain points.

One is the speed of construction and the other one is the higher returns on capital. And what I mean by this is that when you use models, you need less specialized craft in the data center itself to build a data center. So it's faster and removes the labor shortages. And at the same time, when you place those models outside the data center, you increase the space for the servers inside.

So the revenue per square foot also goes up. So that's the second pain point our customers have, and I think this acquisition covers that. But we also see with the AI adoption that increased power density in the white space will bring a number of opportunities for Eaton to provide sophisticated technology solutions in that space. So we partnered with NVIDIA to help our customers with optimized designs from the chip out.

And recently, we also announced the acquisition of Resilient Power. And that put us in a position to offer the chip out conversion at scale right from the utility field all the way down to the GPUs. So we have a strong position before, Andrew. And I think after those moves, our position is much stronger.

And we consider ourselves to be the only company in the data center space. They can go all the way from the utility down to the chip. So if we have a good position before, now it's even stronger.

And our next question comes from the line of Chris Snyder from Morgan Stanley.

I wanted to follow up on Electrical Americas orders, which obviously showed nice sequential improvement. So I understand the company only discloses orders on a trailing 12-month basis. But our math pegged Q2 up maybe in that 25% year-on-year range. So I guess, is this the right ballpark? And it does seem to imply pretty nice order growth outside of data center.

Yes. So we understand, Chris, that we don't share that. You guys calculate based on the information we share. You're on the right ballpark, it's around 25% growth, accelerating well. And we also see growth in other markets as well, it's not only about data center.

Yes. To complement on this, and we said it earlier on, we are starting to see also some green shoots in the short cycle that was a headwind to the portfolio starting to turn positive. As we said in our prepared remarks, C&I, commercial and institutions, was -- is very strong, and utility was as well. So you see today many end markets being -- driving growth for our company and the industry.

Appreciate that. And then if you look at the Americas organic guide, it calls for better growth in the back half versus what we got in the first half. Is that just a function of orders getting better? Or is there also maybe some volume unlock from the capacity you guys are adding, or maybe even price realization on the back of the tariff?

Can you maybe kind of talk about that, the implied step-up in growth as the year goes on?

Chris, I think that the biggest contributor to the growth in Electrical Americas, the capacity we're putting online in the second half. We announced those investments since a couple of quarters, if not a couple of years, and this capacity is coming online as we speak. In the second half we're going to see most of it for the year. So that's the biggest contributor to the acceleration of growth.

And our next question comes from the line of Jeffrey Sprague from Vertical Research Partners.

I'll come back to Electrical Americas also. Just trying to get my head around the strength in data center, right? I mean if data center and distributed IT are 17% of Eaton, right, that makes it 24% or 25% of Electrical. So it sounds like all the growth really was in data center in the quarter.

Can you just maybe speak to that? I get residential was probably weak. Was something else weak, offsetting maybe the utility strength? Maybe just unpack those moving pieces for us, if you could.

Yes. So first of all, to clarify, the data center data we gave is data shared -- the pure data center, is not including distributed IT, right? So it's not to take the 17%. And you're right, there is more to it than data center only.

We see middle -- high single-digit growth in utilities for the Americas, for example. We see also a recovery in some of the short-cycle businesses we had. So it's not only about data center in this quarter. And moving forward, to Olivier's point on short cycle, we saw a change not only in revenue quarter-over-quarter where we see the short cycle business turning positive in Q2, but the order is also inflected very positively, especially the OEM -- machinery OEM orders jumped nearly 30% in the quarter.

So that, with all of the puts and takes, takes the 12-month basis orders for the short cycle to mid-single digits for the 12 months rolling. So there's more to it. And I would say for the overall company as well, if you look at Aerospace, the Aerospace growth is almost 1/4 of Eaton's growth, right? It's been consistent quarter-over-quarter.

And we have a couple of businesses that are actually declining with the market, which are Vehicle and eMobility. So overall, we have different areas of growth, it's aligned with the market and we are gaining share in most of them.

Great. And then just on Fibrebond it looks like revenues are coming in much stronger than you anticipated. I think the trailing 12- month revenues as of February were like $378 million, and now you're run-rating, it looks like, $560 million or so. So maybe just speak to that, and also specifically, I'm wondering how much Fibrebond backlog came into the backlog number that you shared with us today.

There's got to be some acquisitive backlog, I would imagine.

Yes. So first of all, we are really happy with Fibrebond. They're executing really well. So we are confident that we can get more volume out of that facility.

So this is the reason why we increased the outlook. And they're also winning new businesses. They're winning new orders because the value proposition, to my earlier point, is a strong one for data center operator. So it's really well done.

The process is going well. The integration is going well. They're performing at a high level. And then if you think about, the second part of your question, if you think about the other areas of growth here, on the backlog, we disclosed the backlog growth being organic.

So when you talk about the backlog growth for Americas, it's the organic number. And then Fibrebond brings other $1.2 billion on top of it.

And on Fibrebond, we have been working on this acquisition for a period of time. So we have integrated Fibrebond as part of our go- to-market. So it starts to be difficult today to differentiate Fibrebond alone to Fibrebond within Eaton Electrical America. So the lines are starting to be very, very blurred.

And our next question comes from the line of Steve Tusa from JPMorgan.

Sorry, what was that EA backlog organic again, first of all? And then secondarily, I think on an organic basis, your TTM for total Electrical orders was still down modestly. Do you expect that to go positive in the next couple of quarters?

So first of all, the backlog question you raised, it's 17% for Electrical Americas, the growth.

That's organic?

And then you said -- total backlog.

That's total, includes the Fibrebond we talked about previously.

Okay, yes, got it. Yes, that makes sense. Sorry, go ahead.

Yes. And then what was your second part of your question again?

Yes. I think we have the total TTM for Electrical, total Electrical, down modestly on an organic basis in the quarter. Do you expect that to go positive in the next couple of quarters? TTM.

Are you talking about orders?

Yes. Total Electrical orders, in Global and Americas?

We do not see today, if you look on the TTM basis, straight 12 months, the orders turned positive for the total sector. And for Electrical Americas, they were up 2%, when they were in the prior quarter on the same basis down 4%, Steve.

Okay. So you're already comping positive on an organic basis. TTM is your...

Yes.

Sorry, it's a little bit tough to tease out. And then just secondarily, in the second half, are we seeing the impact of that production step- up in 3 and 4Q? And then how does that play into next year? I know you guys have added capacity.

You announced, I don't know, 12 to 18 months ago, and I think, you said second half of '25 you should start to see some of that. Are we seeing that play through at this stage, in the guide?

Yes. Yes. So it's reflected in the guide. It supports the sequential growth of the company.

And the projects are going well. The expansion projects are going well. A good way to think about it, we have around a dozen projects that are ongoing, 6 of them, the construction is done. We are ramping it up in the second half, with all the initial difficulties to put new operations running.

But it's going really well. And then we're going to have, beyond '25, moving to '26 and beyond other 6 projects, they're going to add to the top line as well. So that's a good way to think about it. So the answer is yes.

We have new capacity coming in. Projects are on track. And we have more to come towards next years.

And our next question comes from the line of Nigel Coe from Wolfe Research.

Most of my questions have been answered. But in terms of the capacity coming online, obviously, you talked about investing and the tariff offsets are the 2 factors in the EA margin. So I'm wondering, are you absorbing a lot of the capacity ramp costs today? And therefore, as you start shipping out the capacity, you start getting better operating leverage?

Or are there additional costs that will come when you increase that capacity in the second half of this year?

The answer is yes. As I mentioned a second ago, we are ramping up 6 different facilities in Electrical Americas. So we are dealing with those inefficiencies as we speak. And as that normalizes, those inefficiencies will go away and then we can print better results coming out of those plants. I don't know if you want to add anything.

Yes. And we have always asked this question, what is the impact of those? We are also investing in go-to-market capabilities based upon the exciting end markets we are facing. We see today due to the ramping of the investments about 1 point of margin headwind in Electrical Americas today.

100 basis points.

100 basis points. Okay, that's material. Is that peak pressure? Or does that sort of live with us now for the next 12 months? And then as you start to get better absorption, we start to get that leverage?

We would expect the leverage to be better probably next year, not earlier, Nigel.

Okay. Great. And then a quick one on the ERP investments. I think that's the major driver of the corporate expense increasing. So just maybe talk about where are we today on the IT systems? What is the end-state of what you want to achieve? And is this a multiyear investment cycle or something that's short in duration?

Yes. So you're talking about the below line items, correct? So let me take a step back and give the bigger picture here. So first of all, we see increase in the corporate costs due to the M&A activity we have because, first of all, we have higher interest expenses coming from the commercial papers.

This is one reason. The second one is that we also would have smaller cash balances due to the acquisitions. So we have lost also some interest in the new guidance. That's another way to think about it.

And finally, to the back of your question, we decided to double down and accelerate AI investments in the company. So we are launching tools to improve front end. So think about Electrical Americas the way we interact with distributors and our customers, our supply chains across the whole company, and modernizing systems for our factories as well. We believe this will pay back in spades as we grow our top line in the next years to come and we work to manage the cost growth more effectively by having those tools.

So this is one reason. And the other way to think about it is if you look at the above-the-line segment performance, it's very solid, right? We have $0.25 beat on average here. So instead of letting all this $0.25 flow to the bottom line, we are redeploying this into investments for our growth, because we see sustained growth not only this year, but in years to come.

And to answer to the second part of your question, Nigel, this is a short-term investment, which shouldn't flow into 2026.

And our next question comes from the line of Scott Davis from Melius Research.

Good color on the expenses coming in because that's key and the scale and the mix and stuff. But which kind of segues into my question, which is, can you get to 40% gross margin once that capacity scales up and ERP spend kind of trails down and such? Is that a KPI that you guys are looking at?

No. I mean we gave you a long-term guide. As we discussed, during our Investor Day, we said to you that we would increase margin by about 4 points -- 400 basis points over the planning period. There is no indication today that we do not have line of sight of those numbers, Scott.

Yes. No, no, understand, Olivier. I think what I'm getting at though is certainly on the operating leverage -- or operating profit line. I'm just wondering kind of the puts and takes of how much of that can you get on gross margin versus operating margin.

Yes. I mean today, we are planning indeed to be close to 40% in gross margin. And we are today including that in our guide. You will see a ramp being included in the second half of this year. And yes, this is where I will -- the way I would comment on it, Scott.

And our next question comes from the line of Nicole DeBlase from Deutsche Bank. Nicole, you might have your phone on mute. And our next question comes from the line of Deane Dray from RBC Capital Markets.

I just want to go back to the new capacity that's coming online. Can you remind us kind of like in size order of which products capacity is coming on? I would imagine transformers is the biggest investment. But just if you could size us, that would be great.

Yes. So it's not only about transformers. Includes transformers as well, but we're also expanding capacity in switch gear. And we also are looking at utility equipment like voltage regulators as well. So those are the 3 biggest for the second half. But then we're going to have more coming into the next couple of years, especially on the data center, UPS side, et cetera.

And if we were thinking your transformer backlog has extended, this is pre-capacity adds, has extended to up to 4 years, how far do you think that backlog, how much does it come down and normalize based upon this new capacity?

Yes. We are -- what we do see now, we are offering lower lead times to our customers. On the lower range of the transformers, we could reduce more the lead times. As you go up the bigger transformers, it's still very long.

So this is where we are tackling. But more than thinking about a linear one-to-one approach, what I wanted to invite to think about is that we have differentiated solutions. We have actually a 3-in-a-box solution that a couple of our hyperscalers standardized their data centers around it. So we're going to actually are running behind, we are catching on the orders trend that we have.

So we don't see necessarily that the backlog will materially go down, at least in the second half of this year, because we see the orders coming in.

Our next question, we have Nicole DeBlase from Deutsche Bank.

I would like to start with Electrical Global margins. I thought the margin performance was pretty impressive in the quarter, north of 20%. Just curious why you guys didn't opt to raise the full year. It does imply a bit of a step-down in the second half.

Yes. I mean we want to be prudent. We are pleased with the performance of Electrical Global, not only from a revenue standpoint, but from a margin standpoint as well. Over time, we want Electrical Global margin to go up and to get closer to ESA.

We're looking at portfolio actions. Most of the restructuring program for the business is going to impact Global, Europe being the bulk of it. And we're looking also at ways to simplify the business. So we believe the margin is going to keep increasing in Global, but we wanted to be prudent in the second half of the year.

Okay. Totally understood. Thanks, Olivier. And then sticking with Electrical Global, can you guys talk a little bit about what you're seeing in the pipeline there? Any sort of step-up in activity in Europe in particular? And it does sound like Asia has been pretty strong.

Yes. So Asia continued to perform at a very high level, Nicole. We're talking about double-digit growth. And if you look at the European business, we start to get traction on orders on data centers in an interesting way.

And the traditional business of the European group is around short cycle, right? And we see here green shoots, right? I quoted before this inflection in orders in Q2. So that is a good sign as well. So to Olivier's point before, we have a lot of work to do to bring EMEA and the Electrical Global part closer to where we are in Electrical Americas.

We have a plan to do exactly that. Operationally, the business is already running better. In Europe, it has a very, very good performance in Asia, and that continues. So operationally, we're running the machine better.

And then we're also looking at reshaping the portfolio through organic actions to resemble what we have in Electrical Americas, but we also, if we find the right target, we're also going to take inorganic actions as well.

And our next question comes from the line of Stephen Volkmann from Jefferies.

I'm going to ask some non-Electrical things, if that's okay. The first one I wanted to ask about was Aerospace. And given the backlog that you have there, I'm curious, as we think about moving into 2026, are there any changes in kind of product mix or end market mix that we should be aware of relative to how that might impact margins?

No. I think if you watch the news, you see that there's more excitement around defense markets. So we raised the end market performance there. If anything, that's the change moving to next year.

As you say, backlogs are solid. We keep, as Olivier shared, we keep winning not only OE business but also aftermarket. So it remains the same mix. The only change will be as we get more of the military and defense orders to be executed in the next year.

That's the only change. But strength overall.

We keep adding also -- as we are ramping this part of the portfolio, we still have inefficiencies in Aerospace. We believe we have a few points, a few hundred basis points of inefficiency still today impacting the margin of this business. So going forward, as we keep running it better, and we are pleased with the progress to date, we should see margin expansion for this business naturally coming.

Well said. Yes.

Excellent. Okay. Great. And then, Paulo, maybe just a shift. eMobility, it feels like the ground has shifted under us quite a bit since we last chatted, just how do you view that business now? Anything different that you feel like you want to do as we go forward in this new kind of environment?

Yes. So for the long term, we believe still that electrification is going to come. It's going to come later than our original plan. But we still see that transition is happening more often and more frequently and strongly outside the U.S. than here, as you can track conversion.

We, in the short term, we're experiencing with a couple of big customers, we have problems. They are having issues with their own ramp-up of their product line. So that's the temporary issue we see. We understand the market dynamics.

If you think about the way we prioritize our investments in that business, we prioritized in the last couple of years the electrical technology we had already for the electrical sector. So we are not starting suffering from scratch, and that protects our bottom line. And we still see the traditional vehicle business as a natural hedge for some headwinds we can get from the electrical side of the passenger car market.

And our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

I think you mentioned some order acceleration around this capacity add. I'm just wondering how much orders have maybe been held back by the capacity, and as you kind of bring this capacity on, we could see some acceleration or further acceleration in orders? And then just given the growth in data center, any incremental capacity adds you're contemplating at this point?

So we -- to your first question, we have strengthened the orders, and we believe this is going to continue. We see that strongly in our negotiation pipeline for the quarter as well. And then if you look beyond what we are doing here in terms of capacity, we believe, for example, the business we acquired, Fibrebond, we already considered in our acquisition that we needed to invest in that business because they are getting tremendous traction with data center operators, both multi-tenant and now also increased hyperscaler interest. So if there is an area that will be new to you guys is where we already saw when we are acquiring Fibrebond that potentially we need to invest to expand that business already.

And in terms of capacity expansion for ESA, as we indicated earlier, we'll keep adding capacity next year as well. So the capacity will start to -- addition will start to plateau at the end of 2026, to satisfy those orders.

Okay. Great. And then -- just wanted to get a feel for confidence within the cash flow and if there's any cash flow benefit from changes in the new tax bill.

We are -- we have not changed the guide for cash flow. We gave you today a range. We believe we will more than likely trend towards the end of the guide. A few reasons for this, and a few reasons which are new since we issued the guide at the start of the year.

First, acquisitions expenses, and second, also the impact of tariff, which is a drag on free cash flow because of the way we -- the payment terms are associated with tariff. But within that, we will be within the range.

And our next question comes from the line of Joe O'Dea from Wells Fargo.

Just I just want to make sure I kind of understand demand trends in EA correctly because it sounds like you may have seen a bit of an inflection, and it comes back to Jeff Sprague's earlier point where data center growth in the quarter seems like can explain the vast majority of the organic revenue growth. But then the commentary around orders sounds like there's broader-based growth across C&I and utility and maybe some other areas. So can you just sort of comment on that and the degree to which you did see an inflection within orders? And then any color on some of the end markets outside of data center?

Yes. So we saw also strength in commercial and institutional for sure. And we also see a growth in the utilities business. While we see -- as we anticipated before, we also see growth in the MOEM in orders and start to turn into positive in revenues as well.

And the areas where we see downside continue to be down is the resi market. And distributed IT is flat. So that's a good way to have a picture of the electrical business.

And did you see that happening in orders before you've seen it happen in revenue? And so we've got that kind of heading into the back half of the year?

Yes. As I commented before, on the short-cycle business, we already saw that inflection in orders there, from Q2 to -- Q1 to Q2. The answer is yes.

Okay. And then just one on the announcement during the quarter and around high-voltage direct current and power infrastructure for AI data centers. At the Investor Day when you talked about the content per megawatt in an AI data center, you talked about that being in a range of roughly 1.2 million to 2.9 million. Just curious as you see some sort of technology shift opportunities there, and you talked about the HVDC, how we should think about the content opportunity for you in that kind of architecture?

Yes. So it's a very important question. So we see our dollars per megawatt to go up with the new architecture of data centers. And the main reason for that is that, with increased power density of the white space, we see it as a very attractive market for Eaton, and will start demanding much more sophisticated power management solutions, distribution solutions.

In the past, our share of the data center, we are heavily focused on gray space like 70% of our business, because in the white space we saw more of a commoditized market with lower margins because the power density was not there. Now if you start putting 1 megawatt racks, that is sophisticated technology that not only we love, but we know how to do it. And that's why we ended up getting a seat on the table for the discussions with NVIDIA. And we are taking this all the way up.

We are not stopping the white space only. As I said before, the acquisition of Resilient Power, it's a very big move to take DC power right from the utility point all the way down to the chips. So we can change the architecture of the data center much more effectively.

Our next question comes from the line of Julian Mitchell from Barclays.

One thing I don't think it's been addressed yet, but perhaps the most notable thing from the release this morning was the cut to the high end of the EPS guidance. And I can see that versus, say, April, FX is a tailwind now, not a headwind. You took up the M&A revenue contribution for Fibrebond versus April. So you've got sort of more tailwinds from FX and M&A, but the EPS guide high end coming down.

And I can see the orders are very good, but you generally have sort of 6 months of revenue in backlog. So a lot of the good orders recently, you'll see in the second half, and it's in that guide. So maybe just help me understand a little bit there the guide moving parts.

So just to clarify, and I would give the colors, Julian, we have increased the midpoint of the guide by $0.07, just to clarify. So meaning the beat of Q2 flow through plus an additional $0.02. So $0.07 increase at the midpoint. That's the way we would like the community to think about it. Let me answer to your question.

You're right, FX is a tailwind. The Fibrebond, we are very pleased with the performance, that's also a tailwind. There are investments in the business today. We are pleased with the way our end markets are behaving.

We want to invest in the business. We talked about AI being one of them. We're investing also in frontline resources. We have some parts of the portfolio performing a bit less well than expected.

Paulo mentioned that. Vehicle and eMobility are the 2 I will refer to. And then resi has been not, has been recovering a bit but still in the close to 0. So overall, if you take the puts and takes, that's the way I will explain the guide. And I will finish by saying we want to be prudent as well regarding the way we guide.

We have some lingering macro uncertainties and also tariff question marks. So that's the way we would think about the second half, Julian.

That's helpful. And maybe my second question, just Paulo, just following up on something you said maybe 15, 20 minutes ago or something. In the context of more capacity coming on stream, particularly in Electrical Americas in the balance of the year, I think, you said we should not expect the backlog to go down materially in the second half. So is the view there that, as you get more capacity, you can recognize the backlog more quickly in revenue.

So the backlog shrinks, but it's not a steep drop because the orders are still pretty good coming in? Is that the sort of conclusion?

Yes. Directionally, you're right. But with the strength in orders, we don't see a reason to believe that book-to-bill will be less than 1 for the year. So yes, the orders are good. We have visibility -- good visibility on Q3 orders already. And yes, we're going to ramp up production, but that shouldn't eat much of the backlog in the second half.

It's going to be very difficult for us to believe that the backlog will not increase by the end of the year. A lot of puts and takes. But with a book-to-bill ratio over 1, it's very unlikely to happen, Julian. And you saw it was very strong again in Q2, growing nicely in -- by about 15% for the company.

further remarks.

As always, the IR team will be available for any follow-up calls. Have the rest of the day, feel good. Thank you, guys. Bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.